Financial stability and sustainable economic growth rely significantly on an effective and resilient banking system. Banks are at the center of the credit intermediation processes between savers and investors, and they provide critical services to their customers who count on them in conducting their daily business. Weaknesses and failures of a bank can threaten domestic and international financial stability. Large and internationally active banks pose more risks to the sector, and to the economy in general, than do smaller ones. Since the outbreak of the global financial crisis of 2007–08, national and international regulatory and supervisory authorities have been working to create safer financial systems, prevent systemic risks, and protect taxpayers’ interests. These initiatives have given birth to several developments in the regulation, supervision, and resolution of banks as well as deposit insurance systems. This chapter elaborates on some of the potential implementation challenges and presents several suggestions to address them.
Recent International Regulatory Developments
The Basel Committee’s Initiatives
Historical Background1
The central bank governors of the Group of 10 (G10) countries2 established the Basel Committee on Banking Supervision in 1974 in response to the disruptions in the international financial markets after the collapse of the Bretton Woods system of managed exchange rates in 1973.3 Countries are represented on the committee by their central banks and banking supervision authorities (if there is a separate supervisory authority from the central bank). The committee aims to enhance financial stability by improving supervisory know-how and the quality of banking supervision worldwide. The committee sets minimum standards for the regulation and supervision of banks, provides a platform for countries to share their experience on supervisory issues, and works to improve cross-border cooperation and identify risks for the global financial system.4
The first Basel Capital Accord (“Basel I”) was published in July 1988. Basel I established a minimum 8 percent ratio of capital to risk-weighted assets to strengthen the stability of the international banking system and to remove unfair differences in national capital requirements. In January 1996, the committee issued a Market Risk Amendment to the Capital Accord, allowing banks to use internal models (“value-at-risk” models) to measure their market risk capital requirements.5
The Basel II Revised Capital Framework, comprising three pillars, was published in June 2004. The first pillar is the 8 percent minimum capital requirement, the second pillar is the supervisory review of an institution’s capital adequacy and internal assessment process, and the third pillar is an effective use of disclosure to strengthen market discipline and encourage sound banking practices.
Basel 2.5 Measures
The global financial crisis of 2007–08 drew attention to the importance of keeping sufficient regulatory capital during significant market stress. The crisis had shown that the level of capital requirements for trading activities was insufficient to absorb losses. The initial response of the Basel Committee to the crisis was a set of revisions to the market risk framework in July 2009, which have become known as Basel 2.5 (Basel Committee on Banking Supervision 2009). The revisions aimed to address the problem of banks’ undercapitalized trading books.6 To increase the overall level of capital for market risk, Basel 2.5 introduced the incremental risk charge, which is estimated based on a one-year capital horizon and calculation of “stressed value at risk.”
Basel III Measures
The Basel Committee in 2010 developed a new comprehensive set of reform measures (Basel III) to strengthen the regulation, supervision, and risk management of the banking sector (Basel Committee on Banking Supervision 2010, revised 2011). The committee aimed to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, improve risk management and governance, and strengthen banks’ transparency and disclosures. These measures are among the most stringent responses to the financial crisis: they strengthen microprudential regulation, which will help raise the resilience of individual banking institutions in periods of stress, and they address macroprudential risks that can build up across the banking sector.7
Basel III measures are strengthening the regulatory capital framework and increasing both the quality and quantity of the regulatory capital base, as well as enhancing the risk coverage of the capital framework. Basel III also brings a minimum Tier 1 leverage ratio (non—risk-based 3 percent) that serves as a backstop to constrain excess leverage in the banking system (Basel Committee on Banking Supervision 2010, revised 2011).
According to the new capital framework, the predominant form of Tier 1 capital (“going concern” capital8) must consist of common shares and retained earnings (at least 4.5 percent of risk-weighted assets at all times). The remainder of the Tier 1 capital base (core Tier 1 and additional Tier 1 capital should be at least 6 percent of risk-weighted assets at all times) must be comprised of instruments that have certain features (subordinated, fully discretionary dividends or coupons, no maturity date, and no incentive to redeem). Instruments that can be qualified as Tier 2 capital (“gone-concern” capital)9 should also have certain features, and Tier 1 capital plus Tier 2 Capital must be at least 8 percent of risk-weighted assets at all times.
Above the minimum capital requirement (8 percent) the committee introduced a capital conservation buffer (2.5 percent), comprised of Common Equity Tier 1, which can be drawn down in periods of stress. The countercyclical buffer (between zero and 2.5 percent of risk-weighted assets) is a macroprudential tool to protect the banking sector in periods of excess credit.10 The committee also introduced a bank-specific countercyclical buffer (between zero and 2.5 percent to total risk-weighted assets) for systemically important banks.
To create a strong liquidity base for banks, the committee introduced the liquidity coverage ratio to promote short-term resilience of a bank’s liquidity (Basel Committee on Banking Supervision 2013). According to this new ratio, banks will need to keep sufficient high-quality liquid resources to survive a severe stress scenario (a 30-day period). The committee also developed the net stable funding ratio to promote liquidity resilience for a longer, one-year time horizon, giving incentives for a bank to fund its activities with more stable sources.11
Core Principles for Effective Banking Supervision
The Core Principles for Effective Banking Supervision (“Core Principles”) are the benchmark for assessing the quality of national supervisory systems, and are also used by the IMF and the World Bank in the context of the Financial Sector Assessment Program (FSAP) to gauge the effectiveness of countries’ banking supervisory systems.12 The committee in 1975 issued the original “Concordat,” which aimed to expand the supervisory coverage to include foreign banking establishments and to provide adequate and consistent supervision across member jurisdictions. The Concordat was revised in May 1983 and reissued as principles for the supervision of banks’ foreign establishments. The principles of the Concordat were reformulated and published as the minimum standards for the supervision of international banking groups and their cross-border establishments in July 1992. In September 1997, 25 basic principles for an effective supervisory system were published. The developments in the global financial markets during the financial crisis made it necessary for the Basel Committee to review and revise the Core Principles. After the revision in 2012, the number of Core Principles was increased from 25 to 29 and merged with the assessment methodology.
As limited human resources make it necessary for the supervisory authorities to employ their resources effectively, the revised Core Principles bring greater focus on risk-based banking supervision that is proportionate to risk profiles and systemic importance. The Core Principles encourage supervisory authorities to devote more time and resources to larger, more complex or riskier banks. The first part of the Core Principles (numbers 1 to 13) focuses on effective risk-based supervision and the need for early intervention and timely supervisory actions, and it addresses supervisory powers, responsibilities, and functions. The second part (numbers 14 to 29) covers good corporate governance, risk management, and compliance with supervisory standards.
Financial Stability Board
General
The Financial Stability Board (FSB) has been active since its establishment (2009) in developing and promoting financial sector policies to enhance global financial stability.13 FSB members have agreed to implement a broad range of policy reforms to build more resilient financial institutions and markets. One of the first priorities of the Board was to address the systemic risks and moral hazards associated with firms that are regarded as “too-big-to-fail.”14 In this respect, higher loss-absorbency capacity, resolution planning, and more intensive coordinated supervision are developed for the financial institutions that have global systemic importance (see FSB 2010, n.d.-b).
The FSB has taken a number of steps to mitigate risks arising from shadow banking, making the over-the-counter derivatives market safer through increased standardization, central clearing, and reporting of all trades to trade repositories. FSB’s work on the legal entity identifier (a unique identification of parties to financial transactions) aims to advance transparency. Sound Compensation Practices are developed to reduce bankers’ incentives to take excessive risk. The FSB also addresses data inadequacies in the sector, especially those of globally active financial institutions.15
Resolution Regimes
The main goal of well-developed micro- and macroprudential supervision is to reduce both the probability and impact of possible failures. Effective crisis management and orderly resolution frameworks are essential requirements to minimize the adverse impacts of failures on the banking sector.
The financial crisis demonstrated the urgent need for effective resolution regimes. The FSB has identified “resolution regimes” as a priority area, and in 2011 developed “The Key Attributes of Effective Resolution Regimes for Financial Institutions” (the “Key Attributes”) for an effective resolution regime (FSB 2011a). Additional guidance documents for insurers, financial market infrastructures, and the protection of client assets were adopted and incorporated as annexes into the 2014 version of the Key Attributes document (FSB 2014). The objective of the Key Attributes is to resolve systemically significant financial institutions in an orderly manner without taxpayer exposure to loss, while maintaining continuity of their vital economic functions. The implementation of the Key Attributes is a critical part of policy measures to reduce the moral hazard risks in the banking industry.
The Committee on Payments and Market Infrastructures
Historical Background
The G10 governors established the Committee on Payment and Settlement Systems (CPSS) in 1990. The CPSS monitors and analyzes developments in domestic payment, settlement, and clearing systems as well as in cross-border and multicurrency settlement schemes in an attempt to contribute to efficient payment and settlement systems and build strong market infrastructure. In June 2014, the central bank governors of the Global Economy Meeting decided to rename the CPSS as the Committee on Payments and Market Infrastructures (Bank for International Settlements 2015). The committee is a global standard-setter that works to promote the safety and efficiency of payment, clearing, settlement, and related arrangements. The committee also serves as a forum for central bank cooperation in related oversight, policy, and operational matters (Bank for International Settlements 2015).
Principles for Financial Market Infrastructures
Financial market infrastructures enable clearing, settlement, and recording of financial transactions, and play a critical role for financial stability. Weak infrastructures can pose significant risks to the financial system and be a potential source of contagion. The Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions (IOSCO) reviewed and updated the standards and developed “Principles for Financial Market Infrastructures” in 2012. The new standards harmonize the existing international standards for payment systems, central securities depositories, securities settlement systems, and central counterparties.
International Association of Deposit Insurers
Historical Background
The Working Group on Deposit Insurance, established by the Financial Stability Forum in 2000, issued its report on the guidance for establishing a deposit insurance system in September 2001. As a result, the International Association of Deposit Insurers (IADI)16 was founded on May 6, 2002, as a nonprofit organization, constituted under Swiss law.17
Deposit insurance is the indispensable component of the financial system safety net. Deposit protection plays a key role for maintaining depositor confidence. The financial crisis underscored the importance of maintaining that confidence. In June 2009, the IADI, together with the Basel Committee, developed the “Core Principles for Effective Deposit Insurance Systems” as a benchmark for countries to assess the quality of their deposit insurance systems (Basel Committee on Banking Supervision and IADI 2009). The Core Principles are also used by the IMF and the World Bank in the context of the FSAP.
In 2014, the IADI revised the Core Principles and merged the compliance assessment methodology into the document (IADI 2014a). The revised Core Principles addressed the need for operational independence of deposit insurers and provided them with additional tools. The revised Core Principles document has 16 principles (the number used to be 18) and 96 assessment criteria.
The rapid growth pace of the Islamic financial services industry has increased the need for Islamic deposit insurance systems that work in accordance with Sharī’ah rules. This need is acknowledged by the IADI, but because the Core Principles do not specifically take into account Sharī’ah rules, a decision was made to adopt a separate set of IADI Core Principles for Effective Islamic Deposit Insurance Systems in collaboration with the relevant Islamic standard-setting bodies. The IADI thus published two discussion papers on Islamic deposit insurance in 2014: “Insurability of Islamic Deposit Investment Accounts” (IADI 2014a) and “Sharī’ah Approaches for the Implementation of Islamic Deposit Insurance Systems Discussion Paper” (IADI 2014c).
Islamic Banking
General
About 75 countries are more or less involved in Islamic finance throughout the world.18 The global Islamic finance industry has grown rapidly over the past decade. The annual growth rate was around 17 percent between 2009 and 2013 (Islamic Financial Services Board [IFSB] 2015b). The industry’s assets are worth around US$2 trillion (World Bank 2015). Legal environments for Islamic banking display great diversity among jurisdictions. The systemic importance of the Islamic banks is relatively higher in some predominantly Muslim countries such as Iran, Malaysia, Saudi Arabia, and Sudan. In most IFSB member countries, Islamic banking is developing alongside the conventional financial sector in dual system environments. The exceptions are Iran and Sudan, which have only Islamic banks.
Islamic banking operations are substantially different from conventional banking. First, Islamic banks’ operations must not breach Sharī’ah law that prohibits interest gain, profit-making without real economic activity, and uncertainty. Furthermore, Islamic banking transactions are based mainly on real assets and centered on risk-sharing that is closely related to the real economy. These features expose Islamic banks to some unique risks such as Sharī’ah noncompliance risk,19 displaced commercial risk,20 and equity investment risk.21 The special characteristics of Islamic banking, therefore, require specific regulation, supervision, resolution, monetary policy, liquidity management, and tax policy.
Similar to conventional banks, a strong financial safety net, an effective crisis management, and a resolution framework applicable to Islamic banks will consequently contribute to financial stability and economic growth. Therefore, parallel standards, taking into consideration the special characteristics of Islamic finance, are crucial for the integration of Islamic finance into the global financial system and for overall financial stability.
Islamic Financial Services Board
The IFSB was established in 2002 as an international standard-setting organization to promote and enhance the soundness and stability of the Islamic financial services industry by issuing global prudential standards on banking, capital markets, and insurance sectors. The IFSB works closely with relevant international, regional, and national organizations such as the IMF, the World Bank, the Basel Committee, and the International Association of Insurance Supervisors (IAIS).
The IFSB sets new standards, adopts existing international standards that are consistent with Sharī’ah principles, or makes changes on these standards in line with Sharī’ah rules before their adoption. The IFSB’s work complements that of the Basel Committee, the IOSCO, and the IAIS. As of the end of 2015, the IFSB published 17 standards, 6 guidance notes, and 1 technical note (ISFB n.d.-b). These standards cover, among others, Sharī’ah Governance (IFSB-10 December 2009), Capital Adequacy (IFSB-15 December 2013), the Supervisory Review Process (IFSB-16 March 2014), and Core Principles for Islamic Finance Regulation (IFSB-17- April 2015).
Accounting and Auditing Organization for Islamic Financial Institutions
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international corporate body that prepares accounting, auditing, governance, ethics, and Sharī’ah standards for Islamic financial institutions and the industry (AAOIFI n.d.-a). The AAOIFI was established in accordance with the agreement signed by Islamic financial institutions on February 26, 1990, in Algiers. AAOIFI was registered on March 27, 1991, in Bahrain as an international autonomous nonprofit corporate body (AAOIFI n.d.-b).
AAOIFI has 200 members from 40 countries, including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry worldwide. It develops new standards and reviews existing standards for Islamic financial institutions. AAOIFI has issued a total of 88 standards: 48 on Sharī’ah, 26 on accounting, 5 on auditing, 7 on governance, and 2 codes of ethics. So far, AAOIFI standards have been adopted by the Kingdom of Bahrain, Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan, and Syria. The relevant authorities in Australia, Indonesia, Malaysia, Pakistan, Saudi Arabia, and South Africa have issued guidelines that are based on AAOIFI’s standards and pronouncements (AAOIFI n.d.-a).
Implementation Challenges
Implementation Monitoring
International institutions and standard-setters have created different mechanisms to assess the implementation of the international financial standards.22 To this end, the Basel Committee established the Regulatory Consistency Assessment Programme in 2012 to monitor the timely adoption of Basel II, 2.5, and III.23 The FSB, on the other hand, was given the mandate of coordinating and promoting the implementation of agreed G20/FSB financial reforms.24 The “peer reviews” are the most intensive monitoring mechanism of the FSB.25 The IMF and World Bank assess the implementation of the international financial standards that they have endorsed, through the FSAP, and the results of these independent assessments are summarized in Reports on the Observance of Standards and Codes. To avoid overlaps between assessments, the FSB determines its topics of assessment in advance in consultation with the IMF and World Bank.26
The IMF, the World Bank, and the standard setters (FSB, Basel Committee on Banking Supervision, IADI, IOSCO, and IFSB) are increasingly devoting substantial time and resources to monitoring the implementation of the growing number of standards across the globe. The assessment process itself, on the other hand, harbors bidirectional challenges concerning both the implementers and assessors.27 In what follows, some of those challenges are analyzed under four headings: human resources, timely and consistent implementation, practical application of the standards, and the unique characteristics of Islamic banking.
Human Resources
Sufficient and qualified human resources are the key to the full, consistent, and prompt implementation of the standards. Therefore, human resources are the most crucial assets of regulatory and supervisory institutions. The adoption of the prudent international standards requires, from the human resources perspective, a high level of language capability, sound knowledge, and expertise on economy, law, and accounting.
The need for implementation of comprehensive regulatory reforms poses significant human resource challenges. One of the most important challenges for assessors and implementers during the adaptation process of the international standards into domestic law is the lack of competent human resources in many national authorities, which may lead to shortfalls and inconsistencies in implementation. Human resource constraints may also prevent supervisory authorities from delivering effective supervision. Thus, it is vital that the domestic team adopting international standards have a sufficient number of competent economists, lawyers, accountants, and information technology specialists. Assessors should check whether domestic institutions of the subject country have sufficient human resources with relevant skills, qualifications, and good grasp of the standards.
To address this challenge, national regulatory authorities should invest more in their human resources and allocate adequate budgets to recruit and train a sufficient number of qualified staff. At this juncture, technical assistance provided by the assessors to the regulatory authorities would help improve the human capacity, reduce shortfalls, and achieve consistent application.
Institutional structures of the regulatory and supervisory authorities may add another layer to the challenges for implementation. Countries employing the “functional approach” to banking supervision are likely to encounter more human resources—and communications-related problems.28 Division of limited human resources among several institutions may result in inefficient use of the total qualified human capacity at hand, which may also lead to collaboration difficulties among the staff of multiple supervisory authorities with different agendas.
Even clear-cut regulations or memoranda of understanding mentioning close cooperation, coordination, and information-sharing may not be able to eliminate divergences in practice. Conflicts may arise particularly from disagreements about the extent of mandates of authorities. To address such conflicts, encouraging the adoption of the “twin peaks” or “integrated” approaches appears to be a viable option.29 This would also facilitate more effective consolidated supervision by eliminating overlap and duplication risks.
Timely and Consistent Implementation
The success of the international financial standards depends primarily on their timely and globally consistent implementation, not least because of ever-growing linkages among economies. The risk of a financial crisis spilling over from one country to others renders timely and consistent implementation of the international standards vital—not only to improve the resilience of the global financial sector but also to level the playing field for all jurisdictions.
Jurisdictions should therefore act to adopt international standards on time, and the assessors, for their part, should intensify efforts to maintain consistency of implementation.30 Because the adoption of the standards brings extra costs to the financial sector, and thus creates competitive disadvantages, countries are generally reluctant to be the first to implement them.
Practical Application of the Standards
To ensure practical applicability of the adopted standards, the legal framework in each jurisdiction should be reviewed for possible hurdles. Compatibility of the implemented standards with other domestic regulations, such as the commercial law and bankruptcy law as well as the constitution, is crucial to achieving a healthy implementation.
Because a substantial part of the tools and powers envisaged by the standards is designed to be used in extraordinary times (that is, when an individual bank or an entire banking system is in a significant stress), it may be difficult to know beforehand whether, or the extent to which, the standards can be applied in practice. Therefore, the practical applicability of the standards should be checked against the relevant regulations. It should be checked, for example, whether the commercial law allows companies to issue contingent bonds that can be qualified as additional Tier 1 and Tier 2 capital. A further solution could involve checking the property law and the constitution to see whether it is possible to override the rights of shareholders/creditors and to what extent the cooperation with foreign authorities is allowed.
As a follow-up to this process of scrutiny, necessary amendments must be made to any regulations hindering the applicability of standards to achieve full compliance and consistent application. Because there are so many jurisdictions, it is particularly challenging for assessors to identify inconsistencies among regulations within a jurisdiction. Therefore, domestic regulators should assess all relevant regulations, communicate with concerned state authorities for prospective amendments to facilitate the practical application, and report to the assessors accordingly.
The Unique Characteristics of Islamic Banking
As mentioned previously, apart from Iran and Sudan, Islamic banks operate alongside conventional banks. In countries where Islamic banking is present, domestic regulatory and supervisory authorities as well as assessors should be aware of the special characteristics of Islamic banking operations and take them into account while regulating and supervising the market.
The Islamic banking standards are likely to be more difficult to implement because of the lack of capacity in Islamic finance, or a lack of support at the political level for implementation. The biggest challenge for assessors and implementers, in this respect, is again building human capacity, but in this case the need for staff equipped with additional expert knowledge about and experience in Islamic finance comes to the fore (Casey 2015). To increase this capacity, domestic authorities and assessors should establish effective cooperation and collaboration channels with the Islamic standard-setting institutions.
To be sure, some cooperation arrangements are already in place. The Bank for International Settlements and the World Bank are associate members of the IFSB (IFSB n.d.-a). The IMF staff, as well, participate in the activities of the IFSB. Furthermore, the Basel Committee, the IADI, and the IOSCO work closely with the IFSB in preparing new standards according to specific features of Islamic finance. The FSB also started to devote more attention to Islamic finance during Turkey’s G20 presidency in 2015 (Group of Twenty 2015).
Yet the assessment of the implementation level of the Sharī’ah-compliant prudential standards remains a fundamental challenge. Integrating the assessment of Sharī’ah-compliant standards into the FSAP can be a solution. Collaboration of the IMF and World Bank with the Islamic standard-setters in assessment of Sharī’ah-compliant standards is of critical importance. Such cooperation and collaboration under the FSAP in countries where Islamic banks operate will help better integrate Islamic banking into the global surveillance framework and thereby contribute to the stability of the global financial system.
The assessment of application of the Core Principles for Islamic Finance Regulation, for instance, could be conducted under the FSAP (ISFB 2015a). In this case, the IMF and World Bank would effectively collaborate with the IFSB in assessing the implementation of the Core Principles for Islamic Finance.31 On the other hand, because the Islamic standards have not been implemented widely, and countries do not have the capacity or intention to put in place Sharī’ah-compliant frameworks for Islamic banks, the assessment against the Islamic core principles can be discretionary.
Nevertheless, the Islamic Development Bank, the Islamic Research and Training Institute, the IFSB, and the International Islamic Financial Market—in collaboration with the IMF and World Bank—have taken some steps to supplement the FSAP with Islamic financial assessment.32 Within this context, an analysis of the gaps between the FSAP and the needs of Islamic financial sector was conducted. There is also a pilot Islamic FSAP project that is planned to be organized by the Islamic Development Bank in the near future.
Last but not least, it is always possible for domestic regulatory and supervisory authorities to adopt the IFSB standards to better address the Islamic banks’ business models and conduct self-assessments.
Conclusion
A resilient global financial system depends on sound financial regulation and supervision. The recent crisis, just as the previous ones, demonstrated that a financial crisis in one country can quickly cross borders and create global turbulence. The international standards developed on the basis of the lessons learned from the financial crisis should be implemented across the globe in order to fully realize the benefits. Institutional and prudential arrangements should be put in place to improve the resilience of banking sectors in the face of domestic or international financial crises. This primarily requires qualified and adequate human capital; timely, consistent, and practical implementation; and due consideration to the idiosyncratic characteristics of the Islamic banking.
References
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Mehmet Siddik Yurtcicek is Senior Counsel Manager at the BaFin Consultancy, and Mehmet Sefik Yurtcicek is an Islamic Finance Consultant.
For detailed information, see Basel Committee on Banking Supervision 2016.
The Committee has 28 member jurisdictions after expansion of its membership in 2009 and 2014.
Examples are the failures of Bankhaus Herstatt and the Franklin National Bank of New York in 1974.
The Committee’s decisions are just recommendations that are expected to be implemented by national authorities but do not have legal enforceability.
“Value at risk” is a measure that quantifies the level of financial risk within a firm or investment portfolio over a specific time frame. See Investopedia 2019.
“Trading book consists of positions in financial instruments and commodities held either with trading intent or in order to hedge other elements of the trading book.” For this definition and detailed information, see paragraphs 684–89 in Basel Committee on Banking Supervision 2004.
The macroprudential approach focuses on the financial system as a whole.
The “going concern” capital is the capital that allows a bank to continue its activities and keeps it solvent.
“Gone concern” capital is capital that acts as support for depositors in receivership, bankruptcy, or liquidation but has less of a role in preserving the bank as a “going concern.” See Cohen 2010.
Countercyclical capital buffer is intended to protect the banking sector against losses that could be caused by cyclical systemic risks. Banks are required to keep more capital at times of credit growth that can be reduced when the cycle turns.
For more details on the committee’s works on strengthening the international regulatory framework for banks, see “Finalising Post-Crisis Reforms: An Update. A Report to G20 Leaders” (Basel Committee on Banking Supervision 2015).
FSAP is a comprehensive assessment of a country’s financial sector. FSAPs analyze the resilience of the financial sector, the quality of the regulatory and supervisory framework, and the capacity to manage and resolve financial crises (IMF 2017).
The FSB was established in April 2009 as the successor to the Financial Stability Forum, which was founded in 1999 by the G7 finance ministers and central bank governors.
“Too big to fail” refers to institutions that are so big, complex, and interconnected with the rest of the financial system that the public cost of allowing them to go out of business is judged to be too high.
For more information, see the “First Annual Report” (FSB 2015).
IADI has 80 member organizations, 9 associates, and 13 partners.
See details at International Association of Deposit Insurers n.d.
See also “List of Members: By Category” (IFSB n.d.-a).
Sharī’ah noncompliance risk is the risk that arises from a bank’s failure to comply with the Sharī’ah rules and principles determined by the Sharī’ah board of the bank or relevant body in the jurisdiction in which the bank operates.
An Islamic bank may donate a part of its profits to the investment account holders (to be able to give competitive returns), and the possibility of this donation is considered as “displaced commercial risk.” This is because initially the risk is to be borne by investment account holders, but it has been displaced over to the bank as it volunteers to do so.
The risk arises from entering into a partnership for the purpose of undertaking or participating in a particular financing or general business activity as described in the contract, and in which the provider of finance shares in the business risk.
For the list of Key Standards see FSB n.d.-b and IMF 2002.
See Basel Committee on Banking Supervision 2012, revised 2013 and 2016.
In this regard, see FSB 2011a.
There are two types of peer reviews: thematic reviews and country reviews. Thematic reviews focus on the implementation and effectiveness of standards across the FSB members. Country reviews focus on the implementation and effectiveness of regulatory, supervisory or other financial sector policies in achieving the desired outcomes in a specific FSB member jurisdiction.
For detailed information see FSB (2015), Standing Committee on Standard Implementation.
In this document the term “assessor” is used to define the assessors of international institutions such as the IMF and the World Bank, and the assessors of the standard setters such as the FSB, Basel Committee on Banking Supervision, IADI, IOSCO, IFSB, etc.
The “functional approach” is one in which supervisory oversight is determined by the business that is being transacted by the entity, without regard to its legal status. Each type of business may have its own functional regulator.
The “twin peaks approach,” a form of regulation by objective, is one in which there is a separation of regulatory functions between two regulators: one that performs the safety and soundness supervision function, and the other focuses on conduct-of-business regulation. The “integrated approach” is one in which a single universal regulator conducts both safety and soundness oversight and conduct-of-business regulation for all the sectors of a financial services business. For a detailed account on the matter, see Group of Thirty 2008.
Even the use of national discretions can impair the comparability of implementation across jurisdictions. Therefore, the Basel Committee decided to eliminate certain discretions. See Basel Committee on Banking Supervision 2014.
This collaboration can be similar to the Basel Committee’s collaboration with the IMF/World Bank in their monitoring of the implementation of the Committee’s prudential standards.
The Islamic Development Bank—World Bank Working Group on Islamic Finance met in Jeddah during January 2009. The Islamic Research and Training Institute and the Islamic Development Bank prepared a document entitled “Towards Developing a Template to Assess Islamic Financial Services Industry (IFSI) in the Bank-IMF Financial System Assessment Program (FSAP).”